I am a personal finance and investing blogger. A software designer by profession, I have a passion for economics, business, finance and investing. My personal financial goals are to generate enough passive income to fund my retirement, and along the journey - share my experiences and help the readers.

Gold As An Investment Vehicle

Earlier this week, I posted an article on gold as an alternative form of investment. Gold is one of the oldest and most popular forms of investments and has proven to be an excellent hedge against inflation. In that article, I discussed a few different vehicles that one can use to invest in gold. One of the methods is to invest by buying equity in gold mining companies. This article looks at the beaten down sector, where some truly great value finds can be uncovered.

Why Gold?

Before we go into the details of which companies, lets first address what the role gold plays in this world. It has been touted by many as a useless barbaric metal that does not serve any purpose. I have to respectfully disagree with such comments as gold has proven to be the safe haven everyone runs to, when shit hits the proverbial fan. In a loose monetary policy environment where asset bubbles are inflated everywhere you look, we are stumbling on the verge of one catastrophe to the next. It is just a matter of time before we hit a new financial crisis.

I do agree that simply owning the metal may seem like dead money – as the bullion or coins do not provide any income or provide much liquidity, but if we look outside the retail investors, who are the big buyers of gold? It is usually central banks and governments. An entity that has to provide some validation for its paper currency. Most currencies such as the US$ may now have dropped the gold pegging that once existed, but emerging superpowers need to hold gold in their vaults if their currency is to be taken seriously. Ask yourself – would you trust the US$ in the 18th, 19th or 20th century if it was not backed by gold? Same goes for the Renmibi today. China is going to be the largest economy in the world – and is an economic superpower to be reckoned with. With the new exchanges and banks being established – such as the BRICS bank and Asian Infrastructure Investment Bank (AIIB), the Chinese Yuan will start becoming the defacto currency in the coming decades, and gold provides the validity. This is regarded by many as the reason why China has been buying so much gold in the last few quarters.

But this is a digression from the topic of gold mining stocks. I think we can all agree that one way or another, we will still need to keep the supply of gold coming to the market – and the mining companies are not going to completely disappear from the face of Earth.

Gold Mining Companies

The sector has seen some intense pressure in the recent quarters – with many of the companies running deep in the red. The following takes a look at the major players in the space. The companies in this space are so beaten down and shunned by Wall St, that they just might make for a great investment.

I ran a very simple screener on FinViz that listed all gold mining companies traded on the US markets, with a market cap of atleast $2B, and pays a dividend. The result is a small selection of 9 companies – many of which are based in Canada, but for the sake of this article, I use the US-listed stock and all numbers used are in US$.

Observations:

The P/E varies quite a bit and some of the companies (the one with ‘-‘ in P/E column) have negative earnings, so their P/E ratios do not make sense.

However, the EPS growth is phenomenal for some of these companies with companies expected to return to profit either this year or the next.

Most companies seem to be trading at a discount to their book value – as shown by the P/B ratio.

Some of the companies also have a great cash position. For e.g., Newmont Mining (NEM) is trading at US$17.67, has a book value of share $22.32 (P/B = 0.77), and has cash reserves of $6.31 per share.

The debt situation is also pretty good for most companies, although I have to disclose that I have not looked at the debt repayment schedule for each of the companies yet.

The operating margin also varies – but some companies seem to be doing pretty well even in this tough environment.

Most of the companies are small players – I wouldn’t be surprised to see some consolidation in the industry to create a better merged company that can withstand the tough deflationary environment.

Over the course of last few months, gold and gold mining stocks have taken a beating. Where gold will go from here is anybody’s guess. Depending on who you ask, forecasts range from a low of $350 to a high of $5500 (current price of gold is $1084, and a fair value of ~$850). The value of gold has fallen approx 40% from its peak, and the gold miners have fallen close to 70-80%. I believe when a whole sector falls by ~80%, it deserves a closer look.

I own one company in this space – IAMGOLD Corp (USA) (NYSE:IAG). The company used to have a market value well over $2B, but the pressure on the sector has pushed it down to a $560M market cap, with a share price of US$1.44. The dividends were also cut, but I continue to own it – as I find that the fundamentals are still decent. The company has negative earnings, but earnings are expected to rise 68% this year, and 26% next year. The P/B is 0.21 (book value per share is $6.93) and cash per share is $2.10 – well above the current share price. I have been able to generate some income on this holding by writing covered calls in the past although I haven’t done so in more than a year.